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Is the response of the bank of England to exchange rate movements frequency-dependent?

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  • Caraiani, Petre
  • Gupta, Rangan

Abstract

In this paper, we estimate a Small Open Economy Dynamic Stochastic General Equilibrium (SOEDSGE) model of the United Kingdom (UK), with the main focus being to test the hypothesis whether the Bank of England (BoE) responds to (frequency-dependent) exchange rate movements or not. For our purpose, we use an extended quarterly data set spanning the period of 1986:Q2 to 2018:Q1, which in turn includes the zero lower bound situation, and also estimate the SOEDSGE model based on observable data decomposed into its frequency components. We find that the BoE not only responds to exchange rate movements in a statistically significant manner, but also that it primarily focuses on long-term movements of currency depreciations more strongly than short-term fluctuations of the same. In general, our results are also confirmed for three other developed inflation-targeters namely, Australia, Canada and New Zealand.

Suggested Citation

  • Caraiani, Petre & Gupta, Rangan, 2020. "Is the response of the bank of England to exchange rate movements frequency-dependent?," Journal of Macroeconomics, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:jmacro:v:63:y:2020:i:c:s0164070419302344
    DOI: 10.1016/j.jmacro.2019.103187
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    More about this item

    Keywords

    Small open economy DSGE model; Monetary policy rule; Exchange rate; Structural estimation; Bayesian analysis; Wavelets;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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